Frank Strauss, chief executive of German retail bank Postbank, has denied persistent rumors that the bank is to be fully integrated into its parent group Deutsche Bank, rather than spun off as planned. "Deutsche Bank has very clearly communicated its decision to part with Postbank. This decision has since been confirmed by the management every quarter, and we are concentrating hard on implementing it," he said.
Mr. Strauss admitted that the issue was causing some uncertainty for his organization, but emphasized that it had been clear from the outset that this would be the case. Deutsche Bank, the German market leader, acquired a stake in Postbank, formerly a subsidiary of postal service operator Deutsche Post, in 2008 and later became the sole shareholder. It announced its decision to sell the subsidiary in April 2015. The plans have since been put on hold due to volatile market conditions.
Mr. Strauss pointed out that Postbank has been through a similar process of change once before, with its spin-off from Deutsche Post and partial flotation in 2004. "We can make good use of the time until our planned flotation, as we have a clear strategy that we're systematically implementing," he said, adding that the plans had the full backing of staff, with an employee survey showing that employee satisfaction had increased further in 2016.
Speculation that Deutsche could decide to reintegrate Postbank has been fueled by the fact that there does not appear to be a buyer for the chain, while conditions are not good for an initial public offering. Mr. Strauss said that the market was extremely difficult in 2016, but highlighted that in the last few months various indicators have suggested that the situation is gradually becoming more positive. European banking stocks have recovered significantly since mid-2016, he said, while the outlook for interest rates has improved, even if rates are still very low. Negotiations on "Basel IV" regulations relating to capital requirements are expected to be concluded soon, which he expects to significantly reduce uncertainty for banks.
Mr. Strauss pointed out that Postbank has been an independent unit under the umbrella of Deutsche since mid-2016 and that it is working on getting its affairs in order to make itself fit for the future. "I am convinced that Postbank will be successful on its own," he said. "There will definitely be a place for Postbank in Germany's banking sector." The Bonn-based bank has 14 million customers and is well on the way to earning its cost of equity, he said, which is somewhat unusual in Germany. Moreover, he believes it has a clear strategy, appreciated by German society.
Free accounts only work with cross-subsidization, and that isn't possible any more in times of ultra-low interest rates. Frank Strauss, Postbank
In 2016, Postbank achieved a positive return on equity despite €200 million ($213 million) in costs for the demerger and investment in the bank's future, and in spite of the ongoing low interest rate environment. The return on equity for the third quarter was around 5 percent. After the deduction of restructuring costs it came to about 7.5 percent. Assuming that the cost of equity is just under 9 percent, Mr. Strauss said that the bank is already coming fairly close to its target of earning its cost of capital by 2018.
The bank's core capital ratio is at around 12 percent, which was definitely adequate for its risk profile, he said. With regard to profitability, he anticipates only a slight drop in net interest income for 2016, followed by an increase in 2017. To improve net commission income, he plans to boost the bank's securities business.
In terms of efficiency, Mr. Strauss said the bank would show a much lower cost base. He highlighted that Postbank had reduced its workforce by 3 percent in net terms and said the lender had achieved this in a socially acceptable way. The bank is also investing in areas such as digitalization.
Where necessary, he said the bank would continue to adjust its capacity. However, he emphasized that this will not necessarily involve cutting the number of branches. "For us, branches are a competitive factor." Together with its former parent Deutsche Post, the bank operates over 6,000 points of contact, and Mr. Strauss said this partnership provided the chain with a much more favorable cost structure compared to its rivals. Postbank plans to expand on this and to include new formats such as larger distribution centers in metropolitan areas and compact branches in smaller towns.
One major issue for Postbank are the excess deposits that the bank has accumulated as a result of the negative interest charged by the European Central Bank for banks' deposited funds. In response to this challenge, Postbank is aiming to expand its lending business. In the first nine months of last year it increased lending by around 13 percent, which Mr. Strauss said was due in particular to its construction financing business, commercial real estate financing and a drive to do more business with small and mid-sized companies. This reduced excess deposits by about €1 billion, helping to stabilize net interest income.
There is a risk that this rapid expansion could lead to a build-up of bad loans. Mr. Strauss made it clear, however, that the bank's risk policy and lending criteria had not changed. "Each individual transaction must be profitable in the long term," he said.
The bank has been criticized for scrapping free current accounts. Mr. Strauss said that most customers have been understanding and that far fewer customers appeared to be leaving the bank than had been expected. In November and December, the months in which the changes were implemented, he said the bank's branches had reported an increase of almost 10 percent on a yearly basis in new current account business.
Mr. Strauss stopped short of admitting that it had been a mistake to offer free current accounts, but said that this was to some extent part of the zeitgeist and that things were changing. Postbank pioneered free retail accounts in Germany in 1998. With regard to account fees, all banks, including large direct banks, are working out their limits. "Free accounts only work with cross-subsidization, and that isn't possible any more in times of ultra-low interest rates."
Rock-bottom interest rates are to blame for the fact that German savers no longer achieve returns, a situation compounded by a rise in inflation to 1.7 percent in December. Mr. Strauss acknowledged that low interest rates were a challenge for German savers and for the economy as a whole, but pointed out that they also allowed German businesses to easily obtain cheap loans. The situation in other European countries was different, however, and Mr. Strauss said this needed to be taken into account.
Overall, the ECB's policy was a question of balance, Mr. Strauss said. "The ECB sees stability at an inflation rate of about 2 percent. A rise in inflation is thus also a step in the direction of the central bank's target, which will hopefully bring the normalization of monetary policy closer," he said.
Many experts say low interest rates have undermined the business model of BHW, the home loans subsidiary of Postbank. Mr. Strauss insisted that BHW is a strategic part of the group's business and therefore belonged to its core activities; not least, he said, because its lending business is helping to reduce excess deposits. He added that the division required further optimization, however, with the home loan business remaining highly challenging in the current interest rate climate. Postbank planned further significant investments in this area, the lender's head said, without providing further details.
Sven Afhüppe is the editor in chief of Handelsblatt. Michael Maisch is the deputy chief of Handelsblatt's finance desk and based in Frankfurt, Germany's financial capital. To contact the authors: [email protected] and [email protected].